CHART OF THE DAY: Existing Home Sales vs Pending Home Sales

Editor's Note: The chart and blurb below are from today's Morning Newsletter written by Hedgeye Macro and Housing Analyst Christian Drake. Click here for more information and to subscribe.

"...As can be seen in the Chart of the Day, the recent tendency has been for EHS to re-converge with PHS. Given the prevailing pattern, unless PHS in April (released 5/28, next Thursday) are very soft and/or March sees a significant negative revision, the path of least resistance is for upside in Existing Sales over the next couple months. Further, the trend in the high frequency mortgage purchase application data, which is currently running +14% QoQ and +13.3% YoY, argues in favor of that expectation more so than not..."

It Gets Late Early

Yogi turned 90 last week. Hedgeye will turn 7 in June. From the mound to markets, deep simplicities and pithy aphorisms are still ageless.

When Berra donned post-war pinstripes en route to 3 AL MVP’s, 18 All-Star appearances and 13 World Series championships, the U.S. was enjoying a productivity boon, the demographic tide was just beginning to come in, the middle class was ascendant, Buffett was still small enough to perform and the prospects of rising household leverage and modern central banking carried an air of secular opportunity.

“The Future Ain’t What It Used to Be”

Back to the Global Macro Grind...

Hedgeye’s formal coverage of the Housing sector turned 1 last week and I’ve chronicled our evolving investment view of the sector recurrently in the Early Look over the last year.

Our 2Q15 Housing Themes call, which we presented back on April 2nd, was titled “If it Ain’t Broke” … the allusion being that our reversal from bear to bull in late 2014 was working with Housing outperforming every other sector through 1Q15 and the fundamental strength looked set to continue.

The core of the 2Q call could be sufficiently captured in the context of the following four factors:

The Data: The cocktail of easy comps, improving fundamentals, credit box expansion and rebound demand (i.e. deferred housing consumption due to weather) should conspire to drive accelerating rates of change in reported housing data in 2Q.

The Dilemma: Housing equity performance shows pronounced seasonality with 4Q/1Q being periods of marked outperformance and 2Q/3Q generally being periods of relative softness. At the same time, the implementation of new TRID regulations on August 1st could emerge as a mild-to-large speedbump to reported activity.

The Distillation: The convergence of performance seasonality and new regulation (TRID) – along with emergent issues such as the California drought and step function back-up in global bond yields - pose a collective risk to housing activity into the end of 2Q. While we remain mindful of those quasi-latent risks, it’s likely accelerating rates of change in both demand and price dominate investor mindshare in the more immediate-term.

The (tactical) Decision: Let’s stay long accelerating improvement in the immediate-term and then look to lower exposure into the collective crescendo of concern as it builds into mid-late summer

To frame it another way: If I told you housing would put up the best rate of change numbers in all of domestic macro – and, arguably, in all of global macro – would you want to be long or short that?

So, how has the data come in thus far in 2Q?

Housing Starts: New 7-year high in the latest month

Purchase Applications (existing market): 2Q15 Tracking +14% QoQ and +13% YoY, on pace for best quarter in two years.

Pending Home Sales (existing market): PHS are up an average of +11.8% year-over-year the last two months

New Home Sales (new market): NHS are up an average of +22.5% year-over-year the last two months

HPI: After a year of discrete deceleration in home price growth in 2014, 2nd derivative HPI has seen 3 consecutive months of acceleration through the latest March data.

How have the stocks performed?

April (Rate Rise + Builder Margin Concerns): Of the four categories we profiled in our 2Q themes call as being beneficiaries of Housing's ongoing improvement, only one, the Mortgage Insurers, beat the market in April. The builders underperformed significantly and the Title Insurers and Home Improvement chains underperformed moderately.

May: Housing got its mojo back in May, rebounding strongly over the last couples weeks alongside the moderation in rates and ongoing strength in reported price/volume data.

The somewhat confounding part is that even if I knew then, what I know now in terms of how the fundamental housing data would come in in 2Q, I would have made the same decision to lean long in April.

What about Existing Home Sales yesterday, that missed right?

EHS in April were certainly underwhelming, missing estimates and declining -3.3% sequentially (although they were still +6.1% YoY). Below is how we contextualized the data in our institutional note yesterday:

Here’s the primary issue at play: Pending Home Sales and Existing Home Sales have shown recurrent bouts of divergence and re-convergence in recent quarters. Definitionally, Pending Home Sales (PHS) represent signed contract activity while Existing Home Sales (EHS) represent actual closings. The two measures are invariably tethered and, given the mechanical nature of the relationship, PHS serve as a strong leading indicator for EHS with the relationship strongest on ~1mo lag.

There is some chop in the data from month-to-month but, absent some acute shock to the qualifying ratio, the two only diverge for so long and so much in magnitude before re-convergence between the two series occurs. Practically, this can only occur in a few ways – one series can fully re-couple with the other on a lag, both see subsequent revisions in opposite directions and/or both series (for whatever reason) move in opposite directions with spread compression from both directions.

As can be seen in the Chart of the Day below, the recent tendency has been for EHS to re-converge with PHS. Given the prevailing pattern, unless PHS in April (released 5/28, next Thursday) are very soft and/or March sees a significant negative revision, the path of least resistance is for upside in Existing Sales over the next couple months. Further, the trend in the high frequency mortgage purchase application data, which is currently running +14% QoQ and +13.3% YoY, argues in favor of that expectation more so than not.

Universality is the hallmark of acute observation. Clever linguistics provide the effervescence and perdurability. Ahead of the holiday weekend – and just because they’re good – I’ll leave you with a few of Berra’s best (annotated with associated investment applicability):

“It gets late early out there” (counter-cyclical investing… remember, the data always looks best before the crest)

The Macro Show Replay | May 22, 2015

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Early Look

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Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

TREND: ECB head MarioDraghi will continue to ramp the QE machine, muting EUR/USD appreciation. Expect concessions made to Greece to advert default and Grexit. The macro team forecasts weakness in U.S. data that should perpetuate positive European equity flows, in particular to Germany. Bullish quantitative TREND & TAIL

On 4/14 we presented a 40 page slide deck titled Germany: Still Bullish (CLICK HERE for a video replay). Given the weakness in recent German data and the DAX (down -3% since our call), we believe it’s worthwhile to revisit and update our outlook.

Clearly the data over the TRADE has taken a leg lower. Below we show some key German and Eurozone fundamental data points that have recently missed estimates:

Recent economic data points to weakness, but our bullish call on Germany was not predicated on the data (as the economics YTD have been weak at worse or grinding slightly higher at best). Rather focused on Draghi’s QE program and the benefit that the German economy would reap from a weak EUR/USD.

We believe the recent data misses in concert with the Greek consternation (everything from Grexit to Greek bankruptcy) has roiled European markets (especially the DAX) over recent weeks.

In addition, we’ve seen strengthening in the EUR/USD over the near-term TRADE duration (~ +4.5% since our Germany: Still Bullish call) which has further pressured the DAX lower. And as we move forward over this TRADE duration, here are the key macro calendar catalysts that we think will take the USD lower, and therefore the EUR likely higher:

May 29th – ugly headline Q1 2015 GDP report will keep political pressure on the Fed to push out the dots

June 5th – watch out for the cycle on the labor front; especially if we get the 2nd bad jobs report in the last 3

June 17th – Fed Day in America (FOMC meeting); sleep in until 9AM and just buy everything

All that said, our TREND view on the DAX remains intact.While it’s tenuous ground, we have eyes wide open of the centrally planned world we live in. We expect Draghi to continue to have his foot squarely on the QE gas pedal, especially as fundamental data underperforms. In this light, we see Draghi poised to win the currency debasement war versus Janet Yellen’s Fed, if conditions warrant.

Here’s why we think German equities get a lift over the TREND:

History has shown that the Eurocrats cave against any and every pressure of a member state to default or threaten to break-up the Eurozone. Therefore, once again, we expect the current Greek debt issues to “settle” (some sort of concessions will be made to kick the can down the road). This should boost most European equities that have been held down in recent weeks by (more) great uncertainty over the Greek state

All-In QE. We expect the QE machine to ramp higher over the coming months (see recent buying in the chart below). We got a preview of this on Tuesday in remarks from the ECB board member Benoit Coeurewho said the Bank will frontload QE purchases in May and June and will backload in September if needed. Expect such commentary from Bank members to chase the EUR/USD lowe.

ECB Minutes confirm united board. Minutes released today show unity on policy measures (QE and no change in rates). We expect Draghi’s firm hand of “whatever it takes” to prevail –he’ll will Eurozone equities higher even if he struggles to inflect growth and inflation.

US data weaker. Hedgeye’s macro team forecasts weaker data ahead, which should help fuel the Eurozone equity trade.

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05/21/15 01:06 PM EDT

INITIAL CLAIMS | CONTINUING AT 15-YR LOWS

Takeaway:Claims continue to show strength, posting the best numbers since April 15th, 2000.

Below is the breakdown of this morning's initial claims data from Joshua Steiner and the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact

New Lows...& A Cycle Reminder: Seasonally adjusted jobless claims came in at 274k last week, slightly higher than expectations for 270k. Even with the slight miss, this is a strong print. The rolling 4-week SA figure dropped to 266.3k. This is the lowest rolling SA figure since the week ending April 15th, 2000, which also came in at 266.3k. In the first chart below, the 4/15/00 data is circled in red. It is important to bear in mind, though, that that date also corresponded to the peak in equities two cycles ago.

In the second chart below, indexed claims in energy heavy states improved more than the country as a whole in the week ending May 9th. The spread between the two series fell from 25 to 21.

The Data

Initial jobless claims rose 10k to 274k from 264k WoW, as the prior week's number was unrevised. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -5.5k WoW to 266.25k.

The 4-week rolling average of NSA claims, another way of evaluating the data, was -16.5% lower YoY, which is a sequential improvement versus the previous week's YoY change of -14.2%

Hedgeye Statistics

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